For new or aspiring authors, there are a few business considerations to make before embarking on your writing journey. You need to decide if you are operating your new venture as a hobby or a business. If you are someone who enjoys writing solely for the fulfillment and enjoyment then it's generally a hobby. You can still offset your income with expenses, but only to the extent there is income. If you are writing a book with a profit motive as the end goal, then you could consider it as a business. Nevertheless, the IRS has guidelines to determine this for you, under their "hobby loss rules" provision. Basically, if you don't earn a profit in three of the five years, the IRS will consider your authorship venture a hobby. You can read more about the topic here. It is not uncommon to start writing as a "hobby", then upgrading it to a for-profit "business" venture when that great book idea strikes.
Choosing a business structure and does it really matter?
The simplest way to operate as a business is as a sole proprietorship. You can conduct business under your own name and use your social security number as your tax identification number. If you want to elevate the perception of your business to a higher level, you can obtain a business name for your sole proprietorship by applying for a DBA (aka. doing business as) designation with your city or county. If protecting one’s personal assets is a concern, then consider a corporation or an LLC (limited liability company).
Should you pay estimated quarterly taxes?
Regardless of your business structure, you should pay quarterly estimated taxes if you anticipate that your total annual tax liability will exceed $1000. Assuming this is the case, the way to determine your quarterly tax liability is to estimate your revenue less your expenses for the quarter and multiply the result by your effective tax rate. Payments can be made using 1040-ES by mail or online. You can read more on this topic on a prior blog post of mine.
Should you keep a separate business banking account?
Having a separate business banking account is always a good idea. It helps to keep your personal expenses separate from your business expenses. For bookkeeping and tax purposes, it is a must. It also helps to solidify the business aspect of your authorship venture.
What expenses can you write off from your taxes?
The general rule is that you are able to write off expenses that are ordinary and necessary to your authorship business. This could include publishing costs, book promotion events, advertising & marketing, coaching and writing courses, contracted services, home office, business meals & entertainment, computers, office supplies, printers, etc. The key here is to keep good records. Be sure to keep your receipts and bank statements. A good tip to make this easier is to use a separate card or business credit card to keep track of your business expenses.
Should you obtain an EIN before hiring a team?
Unless you hire employees you are not required to obtain an EIN (Employer Identification Number). As mentioned earlier, you can generally use your social security number as your tax identification number. Although, it is a good idea if you want to keep your social security number private. You can read more about EIN's here.
To apply for one online, follow this link on the IRS website.
Authors are also entrepreneurs, but may not realize that. You are creating a product just like other entrepreneurs. Your completed book needs many hours to be completed and many different skill sets that often need to be outsourced. Furthermore, authors need to oversee and manage publishing, distribution, marketing, promotion and many other facets of running a business. It’s important to build, network and have a strong team working with you.
The information presented in the above article is general in nature, and not warranted or guaranteed. Your situation is specific to you alone, so be sure to speak with a Certified Public Accountant or a trusted tax advisor to discuss your specific situation.
Noel B. Lorenzana is an Illinois Registered Certified Public Accountant, and owner of Lorenzana Tax & Accounting Services located in the north suburbs of Chicago. He is also a Registered Tax Return Preparer with the Internal Revenue Service and provides services to clients in all 50 states.
Mr. Lorenzana has a passion for entrepreneurship and is an active business blogger at his website NoelBLorenzana.com. He also owns and manages online DVD video rental sites DanceFlix.com and BushidoFlix.com. His most recent business venture, CPATaxBuddy.com, is a membership based website where individuals and small business owners can get expert answers to their accounting, tax and business questions for a low monthly membership fee.
Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, Mr. Lorenzana would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.